News of Note
The foreign affiliate dumping rules do not accommodate significant commercial transactions
Email this ContentObservations of Ian Bradley on the foreign affiliate dumping rules include:
- Earn-outs or other deferred share issuances can be problematic as the subsequent share issuances will not generate cross-border paid-up capital to absorb a potential deemed dividend at the investment time
- A PUC grind under s. 212.3(2)(b) can apply to an unrelated party, e.g., where unrelated vendors receive share consideration from a CRIC (generally, a non-resident controlled Canadian corporation) for the sale of a non-resident corporation
- The s. 212.3(15)(a) rule, that control of a CRIC does not include control by an upper-tier parent, means that a transfer of the CRIC to that indirect parent can result in a second application of the FAD rules
- A partnership arguably acts as a blocker, so that Canadian holding companies that are members of a partnership holding a CRIC cannot qualify as qualifying substitute corporations
- PLOI elections (re accepting imputed interest on debts to exclude them from the FAD rules) are impracticable for cash pooling and other arrangements where intercompany balances are changing every day of the year
Neal Armstrong. Summaries of Ian Bradley, "Living with the Foreign Affiliate Dumping Rules", Canadian Tax Journal (2013) 61:4, 1147-66 under s. 212.3(7), s. 212.3(2), s. 212.3(15)(a), s. 212.3(25)(b) and s. 212.3(11).
Muirhead – Tax Court of Canada notes that clients do not pay overtime rates
Boyle J. (who does not mince words) has clearly articulated that it is irrelevant, in determining whether an individual’s corporation has a personal services business, that the corporation and the services recipient intended their contract to be one for services, as that will always be the case. The focus instead is on whether the individual would have been an employee if his or her corporation didn’t exist. Boyle J also observed that being paid extra for overtime generally is inconsistent with a non-employee relationship.
Neal Armstrong. Summary of G & J Muirhead Holdings Ltd. v. The Queen, 2014 TCC 49 under s. 125(7) – personal services business.
Cameco – Tax Court of Canada acknowledges “proportionality” limitation on document production
Osler spent 14,000 hours on producing documents in the Cameco transfer-pricing case. Justice wanted more.
Rip CJ acknowledged the "proportionality" principle, which requires "dealing with a case in ways which are proportionate to the amount of money involved, the importance of the case and the complexity of the issues." Here there were large amounts and complexity (with no comments on importance.) The Crown’s motion essentially was granted.
Neal Armstrong. Summaries of Cameco Corporation v. The Queen, 2014 TCC 45 under General Concepts – Evidence, s. 169(1), and s. 232(1) - solicitor-client privilege.
CRA finds that an avoidance of Part VI.1 tax likely was not abusive where the preferred shares in question did not replace debt financing
An estate avoided triggering Part VI.1 tax, on a retraction of non-voting preferred shares held by it, by getting the corporation to first redeem special voting shares held by the other shareholder – which was a family inter vivos trust with the same trustees as the executors of the estate and also holding non-voting common shares. This caused the estate's preferred shares to become voting pursuant to s. 48 of the Quebec Business Corporations Act - a provision (somewhat similar to s. 24(4)(b) of the CBCA) which effectively deems all shares to become voting whenever none otherwise has voting rights.
CRA concluded:
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this transaction was not caught by the specific anti-avoidance rule in s. 191(3); and GAAR likely did not apply as Part VI.I "contemplates a situation where a taxpayer replaces a debt financing with a taxable preferred share financing," whereas here, the estate's preferred shares instead had previously been created under an estate freeze;
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there was no acquisition of control of the corporation, as the trustees of the previously-controlling trust were the same as the executors (see Consolidated Holding); and
- the addition of voting rights by mere operation of law did not give rise to a disposition.
Neal Armstrong. Summaries of 18 December 2013 T.I. 2013-0511101E5 F under ss. 191(3), 249(4), s. 248(1) - disposition.
Swirsky - Federal Court of Appeal finds that interest on money borrowed to acquire shares of a company with no dividend-paying history was non-deductible
The taxpayer implemented a plan, involving circular transactions utilizing an economically defeased loan from a trust company, which had the effect of converting shareholder loans owing by him to the family corporation into interest-bearing loans owing by his wife (Ms. Swirsky) to the trust company, which she had incurred to acquire his shares. Before affirming a finding of Paris J that Ms. Swirsky had not established an income-producing purpose for the money borrowed by her, Dawson JA noted that the family corporation had historically not paid any dividends (with bonuses instead being paid) nor did it have a dividend policy in place, and it could be inferred that Ms. Swirsky instead only had a reasonable expectation of receiving a capital dividend.
Although one should not read too much into findings made in the context of a tax scheme, these observations may not be comforting to those who deduct interest on loans incurred to acquire non-dividend bearing common shares.
Neal Armstrong. Summaries of Swirsky v. The Queen, 2014 FCA 36, aff'g 2013 TCC 73, 2013 DTC 1078 [at 431], under s. 20(1)(c), General Concepts - onus, and General Concepts - intention.
CRA may deny the insolvency deduction if it is maximized through debt parking
S. 61.3(3) is an anti-stuffing provision which denies the corporate insolvency deduction under s. 61.3(3) at the end of a taxation year if it may reasonably be considered that one of the reasons for the corporation becoming indebted in the year was to increase the deduction. That deduction generally will be larger if a debt owing by an insolvent corporation to the bank is purchased from the bank by its shareholder for 10 cents on the dollar (Scenario 2) rather than that sum being lent by the shareholder to the corporation to be used by it to settle the debt for the same amount (Scenario 1).
CRA appears to consider that it would have the potential ability in Scenario 2 to apply s. 61.3(3), on the grounds that, in the year, the corporation became indebted to its shareholder for the full amount of the debt. This position is dubious, as normally an assignment of the debt to the shareholder would not give rise to new indebtedness.
Neal Armstrong. Summary of 19 December 2013 T.I. 2012-0468851E5 F under s. 61.3(3).
Income Tax Severed Letters 19 February 2014
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Finance and CRA consulted with the OSC on the character conversion rules
The latest OSC Bulletin indicates that OSC "Investment Funds staff took part in several discussions with senior staff from the Ministry of Finance (Canada) and Canada Revenue Agency concerning the [derivative forward agreement] Budget Amendments ... [in which they] provided background information on the use of character conversion transactions by investment funds and the impact of the Budget Amendments."
Neal Armstrong. Summary of Sec. Bull. Issue 37/07 13 February 2014 OSC Staff Notice 81-723 -- 2013 Summary Report for Investment Fund Issuers under s. 248(1) – derivative forward agreement.
Exchangeable shares aren’t dead
An Australian listed company (Mamba) is proposing to acquire all the shares of a Canadian listed company with the same focus on iron deposits (Champion) for share consideration. Qualifying Canadian taxable shareholders can elect to exchange their shares on a s. 85 rollover basis for exchangeable shares of special-purpose "Canco" subsidiary of Mamba. (Largely consistent with the Finance Explanatory Notes on derivative forward agreements) their shares are retractable for Mamba shares, but with an overriding call right in favour of Mamba to acquire the exchangeable shares for Mamba shares.
Departures from standard methodology include: the exchangeable shares must be redeemed by Canco (subject to the Mamba call right) on a date determined by the Canco directors between January 1, 2015 and the 3rd anniversary of their issue (an unusually early "sunset"); financial institutions are prohibited from receiving exchangeable shares; and the call right is exercised only by Mamba directly rather than using an SPV Canadian "Callco."
In contrast to a U.S. acquisition (e.g. Molycorp), there is no angst as to whether the exchangeable shares should be treated as shares of the foreign parent (Mamba).
Neal Armstrong. Summary of Circular of Champion Iron Mines respecting its acquisition by Mamba Minerals under Mergers & Acquisitions – Cross-Border Acquisitions – Inbound – Exchangeable Share Acquisitions.
Split-up ruling illustrates application of butterfly rules to preferred shares
A ruling letter for the split-up of a holding company (DC) held by five siblings illustrates the operation of the butterfly rules where the siblings hold preferred shares of DC in addition to their common shares. Consistently with practice of yesteryear, DC's shares of a corporation (controlled by uncles and cousins of the siblings) over which it did not exercise significant influence are treated as an investment asset.
Neal Armstrong. Summary of 2013 Ruling 2013-0475681R3 under s. 55(1) – distribution.